Download Chapter 1: Human Misery

Chapter 13:
Government Spending,
Taxing, and National Debt
Size of Government
Government expenditures as a percentage of
GDP have grown from 23% in 1960 to % in 199
Expenditures of Federal government have risen
from 17% to % of the GDP between 1960 and 199
Components of Government
Expenditures
Government purchases of goods and services
have remained stable at about 20% of the GDP in
1960-97
Transfer payments have grown from 6% to 1% of
the GDP over this period
Taxes
Tax revenues as a percentage of the GDP
increased from 26% in 1960 to 30% in 1999
Federal tax receipts rose from 18% to 20% of the
GDP over this period
Role of Government: Public Goods
Non-rival in consumption: use by one person will
not require loss of consumption by another person
Non-exclusive: no one can be excluded from
consumption once it is produced
Free-rider problem: everyone uses regardless of
tax payments
Role of Government: Externalities
Benefits and costs of one’s consumption and
production to third parties
Positive externalities require government
subsidies (college education)
Negative externalities require government taxes or
regulations (pollution)
Positive Externalities: MSB>MPB
Price
MPC=MSC
B
P’
P
A
MSB
MPB
Q Q’
Quantity
Negative Externalities: MSC>MPC
Price
MSC
MPC
B
P’
P
A
MSB=MPB
Q’ Q
Quantity
Role of Government: Income Distribution
Progressive taxation and transfer payments to bridge
income gap between the rich & poor
Horizontal equity: people with equal income pay equal
amount of tax regardless the source of income
Vertical equity: people with higher income pay larger
taxes
Incidence of Tax: Inelastic Demand
Price
D
S’
P2
S
Tax
P1
Tax is paid by consumer:
Forward shifting
S’ S
D
Q1
Quantity
Incidence of Tax: Elastic Demand
Price
S’
S
P
D
D
Tax
P1
Tax paid by producer:
Backward shifting
S’
S
Q1
Q
Quantity
Comparative Data
U.S. tax share of the GDP is 31.5%
It is the smallest among industrial nations
The highest share belongs to Denmark, 60%
Composition of Tax Receipts:
1950-2000
Individual income tax share rose from 39.9 to
47.8%
Corporate income tax share fell from 26.5 to 10%
Social security tax share rose from 11 to 33.8%
Excise tax share fell from 19.1 to 3.7%
Effective Federal Income Tax Rates, 1996
Income bracket, $
Tax rate, %
Less than 10,000
8.0
10,000 – 20,000
8.8
20,000 – 30,000
13.3
30,000 – 50,000
17.5
50,000 – 70,000
19.5
70,000 – 100,000
21.1
100,000 – 200,000
22.0
More than 200,000
23.7
Federal Budget Account ($ billions)
Year
Receipts
Spending
Balance
1993
1,154
1,409
-255
1994
1,259
1,462
-201
1995
1,352
1,516
-114
1996
1,453
1,561
-108
1997
1,579
1,601
-22
1998
1,658
1,668
-10
1999
1,743
1,802
+69
Public Debt
Government borrows money from investors
through the issuance and sale of government
securities or bonds
Investors hold the bonds for a certain time period
to make interest income
Government Securities
Non-marketable securities
– U.S. Savings Bonds & Notes: redeemable in cash for
the face value after maturity
Marketable securities
– Treasury bills (< 1 year; low interest rate)
– Treasury notes (1-5 years)
– Treasury bonds (> 5 years, high interest rate)
National Debt
Government borrowing to cover budget deficit
Debt id owed to
–
–
–
–
–
Private investors
Banks and financial institutions
Insurance companies
State & local governments
Foreign governments and private investors
Budget & Debt
Year
Budget
Surplus
National
Debt
Debt Repayment
1998
69
5,479
51
1999*
79
5,615
50
2000*
117
5,712
98
2001*
134
5,781
117
2002*
187
5,818
170
In $ billions
* Estimates
Economic Effects of Federal Debt
Primary burden: opportunity cost of
servicing the debt in terms of reduced
public investment
Inflationary effect: higher interest rates
and prices
Economic Effects of Federal Debt
Income distribution effect: income transfer
from government to high income investors
Output effect: higher taxes and opportunity
cost of productive investment